Quick answer

If you discover an error in rental property depreciation, start by deciding whether you can amend the specific year(s) with Form 1040‑X or if a change in accounting method (Form 3115) is required. Small corrections within the statute of limitations are usually fixed with Form 1040‑X and an updated Form 4562 and Schedule E. Larger, multiple‑year missed depreciation items often require Form 3115 so you can take a Section 481(a) adjustment and correct the method going forward (IRS guidance: About Form 1040‑X, Publication 527, and change‑in‑method instructions).

Why this matters

Depreciation reduces taxable rental income. Under‑claiming reduces refunds or increases tax owed; over‑claiming risks penalties and interest and can trigger depreciation recapture when you sell. Correcting errors keeps your tax picture accurate and protects future planning decisions.

(References: IRS — About Form 1040‑X: https://www.irs.gov/forms-pubs/about-form-1040-x; IRS — Publication 527: https://www.irs.gov/publications/p527; IRS — Depreciation guidance: https://www.irs.gov/businesses/small-businesses-self-employed/depreciation)

When should you file Form 1040‑X vs. Form 3115?

  • File Form 1040‑X to amend a single year (or a small number of years) when you are within the refund statute of limitations and the fix is straightforward. The 1040‑X corrects the tax year by recalculating income, credits, and deductions with the corrected depreciation entered on Schedule E and Form 4562 as applicable.

  • Use Form 3115 (Change in Accounting Method) when the error reflects an incorrect accounting method or when you failed to claim depreciation in earlier years and cannot practically amend all affected years. A properly completed Form 3115 lets you take a Section 481(a) adjustment to account for cumulative missed depreciation in the year you file—often the cleaner administrative route for multi‑year omissions. (See the IRS instructions for Form 3115.)

In practice: many individual landlords with a one‑year math error or missed depreciation will file 1040‑X. Investors who missed depreciation across several years or who treated improvements vs. repairs inconsistently often need Form 3115.

Step‑by‑step: Amending with Form 1040‑X (common path)

  1. Confirm the statute of limitations. Generally you must claim a refund within three years from filing the original return or two years from the date you paid the tax, whichever is later.
  2. Recompute depreciation for the year(s) in question using the correct recovery period, placed‑in‑service date, basis allocation (land vs. building), and method (usually MACRS). Use Form 4562 to calculate annual depreciation and adjustments.
  3. Prepare revised tax schedules (Schedule E for rental income/loss) and the corrected Form 4562 for the year being amended.
  4. Complete Form 1040‑X: explain each change clearly in Part III (or the explanation area), attach the corrected schedules and a copy of the corrected Form 4562. For electronic filing, many tax software programs and preparers can e‑file 1040‑X for recent years; otherwise mail the form to the IRS address listed in the 1040‑X instructions.
  5. If the change produces a refund, the IRS will process it if within the statute; if it increases tax, pay the tax plus interest to minimize penalties.
  6. Amend state tax returns if the federal change affects state taxable income.

Practical tip: keep a clear worksheet showing your original numbers, corrected numbers, and the math that produced the change. The IRS likes clean, documented explanations.

When to use Form 3115 (Change in Accounting Method)

If you:

  • Missed depreciation for several prior years and it is impractical to file multiple 1040‑X returns, or
  • You treated identical items inconsistently across years (for example, expensing items one year and capitalizing and depreciating similar items in another),

then Form 3115 may be the right route. Form 3115 allows you to request an automatic or non‑automatic change in accounting method. If approved (or if the change is an automatic change under current revenue procedures), you report a Section 481(a) adjustment on the year you file the 3115. That adjustment either increases or decreases taxable income to account for cumulative differences.

Note: Form 3115 has its own rules, user fees (for certain practitioners), and timing requirements. Consult the Form 3115 instructions and consider tax‑professional help.

What to attach and documentation to include

  • The corrected Form 4562 for the affected year(s) showing depreciation calculations (MACRS tables, placed‑in‑service date, recovery period, basis allocation).
  • Corrected Schedule E pages reflecting the updated depreciation expense and resultant rental income/loss.
  • A clear written explanation of the error and the computations that produced the change.
  • Copies of closing statements, receipts for improvements, or contractor invoices if the correction is the result of reclassifying repairs vs. capital improvements.

If you use Form 3115, attach the completed Form 3115 and the computation of any Section 481(a) adjustment.

Statute of limitations and timing

  • Refund claims related to amended returns generally must be filed within three years from when you filed the original return or within two years from the date you paid the tax, whichever is later. If you’re outside those limits, you may not recover a refund by filing 1040‑X; you may instead need to change accounting method (Form 3115) to capture missed depreciation prospectively via a Section 481(a) adjustment.

Always check the IRS instructions for up‑to‑date timing rules and consult a tax professional when in doubt.

Interaction with depreciation recapture and selling the property

Correcting previously overstated or understated depreciation affects the gain or loss when you sell the rental property. Depreciation reduces basis; if you claimed extra depreciation in error, you may face larger depreciation recapture (taxed as ordinary income up to the unrecaptured Section 1250 amount) when you sell. Conversely, correcting under‑claimed depreciation generally increases your cumulative depreciation and reduces taxable gain—but increases the potential recapture amount. Plan with your CPA before finalizing large corrections if you anticipate a sale.

(See FinHelp: Tax Reporting for Rental Property Sales: Gain, Loss, and Depreciation Recapture: https://finhelp.io/glossary/tax-reporting-for-rental-property-sales-gain-loss-and-depreciation-recapture/)

Common mistakes and how to avoid them

  • Treating land as depreciable property. Land is not depreciable; allocate purchase price between land and building correctly.
  • Using the wrong placed‑in‑service date or recovery period (residential rental typically uses 27.5 years for the building under MACRS).
  • Confusing repairs and improvements. Repairs are generally deductible in the year incurred; improvements are capitalized and depreciated.
  • Failing to attach corrected Form 4562 or adequate explanations when filing Form 1040‑X.
  • Ignoring state‑level obligations—amend state returns when federal changes matter for state tax.

Real‑world example (illustrative)

A landlord bought a small rental in 2020 but mistakenly allocated the full purchase price to the building and claimed depreciation for the whole amount. The correct allocation should have treated $40,000 as land and $160,000 as building. The taxpayer calculates the corrected annual depreciation, prepares a corrected Form 4562 and Schedule E for 2020, and files Form 1040‑X within the refund period to claim a larger deduction for that year. If instead the landlord failed to claim depreciation for 2018–2022 entirely, they might use Form 3115 to take a Section 481(a) adjustment in a single year rather than amending five separate returns.

FAQs

  • How long do I have to amend? Generally three years from filing or two years from tax paid, whichever is later.
  • Will amending trigger an audit? Not necessarily. Clear documentation and accurate math reduce audit risk. Large or unusual adjustments may attract more scrutiny.
  • Do I need to amend state returns? Yes, if your federal amendment changes taxable income at the state level.
  • Can I e‑file Form 1040‑X? Many modern tax software packages support e‑filing of Form 1040‑X for recent years; check with your provider or preparer.

Professional tips

  • Maintain separate, dated worksheets that show how you allocated purchase price between land and building, how you classified expenditures (repair vs. improvement), and how you calculated depreciation each year.
  • For multi‑year issues, consult a CPA early—Form 3115 is a specialist area with procedural traps.
  • Consider potential depreciation recapture when making corrections; coordinate amendments with any planned property sales.

Links and additional reading

Professional disclaimer

This article provides general information for U.S. federal tax topics and does not substitute for personalized tax advice. Rules for depreciation, Form 1040‑X, and Form 3115 are technical and change over time—consult a qualified CPA, enrolled agent, or tax attorney for advice tailored to your situation.

(Author: Senior Financial Content Editor, FinHelp.io — content reviewed for accuracy as of 2025.)